5 keys to understand changes to Brazilian transfer pricing rules

Brazil has been invited to OECD meetings since 1999. It has adhered to OECD legal instruments, such as the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, participates in OECD committees, and is a member of the OECD's Development Centre. On 25 January 2022, the OECD Council decided to open accession discussions with Brazil. Following the Roadmap for Brazil's Accession to the OECD, in October 2022 the Brazilian government issued an "Initial Memorandum", assessing the degree of alignment in national legislation, policies and practices with the standards established by the Organization.

1. A key item in the agenda between Brazil and OECD has been reforming the complex Brazilian tax system. In particular, in what concerns to cross border transactions, the country had (until today) a formulary approach to transfer pricing that was not aligned with the traditional arm’s length principle. Therefore, on April 2022 the Receita Federal do Brasil, the country's tax authority, along with the OECD Transfer Pricing Unit, presented a resolute plan about the convergence of Brazilian transfer pricing rules to OECD standards, which was the result of extensive work started back in 2018. This plan was sounded with the Brazilian business community and tax professionals during a reasonable period.
2. Last December, a few days before leaving Cabinet, former President Bolsonaro issued Provisional Measure 1,152 adopting this plan, which introduced the OECD arm’s length principle to local legislation. In Brazil such a decree has provisory effects limited in time, unless it is ratified by Congress within 120 days after the issuance date. Therefore, the Provisional Measure was quickly addressed by the Congress under President Lula new term, demonstrating a commitment of the Brazilian society with the OECD process. By the end of last March, the Provisional Measure 1,152 had been approved by Deputies with an overwhelming majority (369 votes in favor, only 10 against). Today, the Senate has finally approved the proposed legislation (Conversion Bill No. 8, of 2023).
3. From a technical standpoint, the new legislation gets rid of the old Brazilian formulaic approach to transfer pricing, introduces the concept of comparability analysis, eliminates the existing royalty deductibility limitations and introduces a modern international tax approach regarding cross border transactions dealing with commodities, intangibles, financial transactions and intercompany business restructuring, among others. By September 2023, taxpayers may opt to have it effective to their transactions for fiscal year 2023 (as of January 1st, 2023). The new system will be mandatory and effective for fiscal 2024 (as of January 1st, 2024).
4. Now the text of Conversion Bill No. 8, of 2023 goes to the President for sanction. Further regulations from the Brazilian tax authorities are expected in the next couple of months.
5. Main consequences of the new transfer pricing rules just passed in Brazil:

• Short run: multinationals doing business in Brazil will need to address proposed changes in transfer pricing regulations sooner than later. Some taxpayers may voluntarily opt to have it effective to their transactions for fiscal year 2023. This law is expected to be beneficial in terms of Foreign Tax Credits for US purposes.
• Mid-term: Joining the OECD transfer pricing rules will help to avoid double taxation and double non-taxation scenarios, also should bring dynamism to the Brazilian economy, meaning new investments and business opportunities, more income and employment, and the improvement of public policies and the overall country's economy.
• Long run: considering Brazil is the largest economy in Latin America, it is expected that this legislation has a positive effect in neighboring countries in terms of the OECD agenda for the region. For example, countries like Argentina and Peru could speed up their institutional convergence plans with the OECD.?

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